Demographic Trends and the Real Interest Rate

Transcription

1 Demographic Trends and the Real Interest Rate Noëmie Lisack, Rana Sajedi, and Gregory Thwaites Discussion by Sebnem Kalemli-Ozcan 1 / 20

2 What does the paper do? Quantifies the role of demographic change (aging) on the decline in global (advanced country) real interest rates Investigate the effect of aging on house prices, household debt Main finding: demographics can explain a large part of the decline in real rates and rise in house prices and household debt since 1980s. Projection: trends will persist given the slow moving persistence process of demographics; global imbalances will get worse 2 / 20

3 General Impression I like the paper. I am very sympathetic to taking demographics seriously as one of the key reasons behind the decline in real rates. I am going to highlight some modeling and data issues which, upon dealing with, will help to clarify and strengthen the paper. 3 / 20

4 POINT 1: Savings Rate or Wealth Accumulation? I believe the authors want wealth but they have life cycle savings What are the issues with a savings focus? 4 / 20

5 Shifts in Demand and Supply for Funds Figure 3.5. Real Interest Rate and Shifts in Demand for and Supply of Funds Supply Real rate (percent) Supply' Demand Funds (U.S. real dollars, bond market) Demand' Source: IMF staff illustration. 5 / 20

6 General framework for the global decline in real rates Investment Decline: The decline in relative price of investment matches the timing of decline starting in 1980s Saving Increase: Savings of China post 2000 period S = S priv + S pub Low public saving/high public debt depress private saving (OLG with no RE) role of FP No role for aging since aging decreases saving in standard PIH/life cycle model so real rates rise Monetary Policy Easing: Important role since 1980s both for short and long term rates Portfolio Shifts: Important role since 2000s given demand for safe US assets 6 / 20

7 Investment Figure 3.6. Investment-to-GDP Ratios (Percent of GDP) Global nominal investment (saving)-to-gdp ratio Advanced economy nominal investment-to-gdp ratio Emerging market economy nominal investment-to-gdp ratio / 20

8 Savings Figure 3.8. Saving Shifts in Emerging Markets 1. Nominal Saving-to-GDP Ratios (percent of GDP) Advanced economies EMEs Saving in Total GDP for Emerging Markets ( , percent) EMEs China Oil exporters Other EMEs / 20

9 Savings: Role of Public Savings and Asia Alfaro et al., 2014 JEEA Average Government Savings/GDP (%), Malaysia Romania Iran, Indonesia Islamic Rep. Tunisia Ukraine Venezuela, RB Mali Egypt, Arab Rep. Bulgaria Chad Thailand Nepal Paraguay Bangladesh Armenia Burkina Faso CameroonLithuania Mauritius Belarus Colombia Morocco Yemen, Rep. Jamaica Rwanda Dominican Ghana Republic Philippines Latvia Panama Kenya Guinea Pakistan Uruguay Albania India Niger Chile Papua New Guatemala Guinea Turkey South Africa Malawi Sri Lanka Mexico Ethiopia Senegal El Salvador Kyrgyz Republic Brazil Benin Uganda Poland Togo Sudan Ecuador Peru Argentina Honduras Madagascar Congo, Rep. Zambia Cote d Ivoire Jordan Tanzania Costa Rica Bolivia Mozambique Average per capita GDP Growth (%), China Legend: 9 / 20

10 Savings: No Role for EM Private Saving Alfaro et al JEEA Average Private Savings/GDP (%), Congo, Rep. Pakistan Panama Thailand India Bolivia Malaysia South AfricaMexico Peru Argentina Sri Lanka Ukraine Papua Honduras Brazil New Philippines Guinea Costa Rica MoroccoIran, Yemen, Turkey Rep. Islamic Poland Rep. Togo Venezuela, Belarus RB Mauritius Indonesia Cote d Ivoire Kenya EthiopiaEgypt, Arab Armenia Rep. Chile Zambia Guinea Jamaica Colombia Ecuador Latvia Jordan Tanzania El Salvador Bangladesh Tunisia Albania Cameroon Paraguay Uruguay Dominican Republic Guatemala Malawi Uganda Lithuania Burkina Faso Madagascar Nepal Kyrgyz Republic Sudan Romania Bulgaria Benin Rwanda Ghana Mozambique Niger Senegal Mali Chad Average per capita GDP Growth (%), China Legend: 10 / 20

11 Public Savings in Asia and Demand for Safe Assets Figure Portfolio Shifts and Relative Demand for Bonds versus Equity Percent of Global GDP Change in foreign exchange reserves (left scale) Gross saving (right scale) Foreign Holdings of U.S. Government Securities (trillions of U.S. dollars) China Other EMEs Total Foreign Holdings of U.S. Government Securities (trillions of U.S. dollars) 4. Foreign Official Holdings of U.S. Securities (trillions of U.S. dollars) Official Total Government securities Private securities Total / 20

12 K/Y Ratio rather than Savings In a life cycle model, easy to get a rise in K/Y ratio with demographics and get an associated decline in real rates Can we add to the model to make wealth accumulation central given increases in longevity? 12 / 20

13 Wealth accumulation in a model of retirement Life cycle savings is not a good model for wealth accumulation Better with retirees and uncertain survival (Carvalho, Ferrero, Nechio, 2016)) 13 / 20

14 Wealth accumulation in a model of retirement Life cycle savings is not a good model for wealth accumulation Better with retirees and uncertain survival (Carvalho, Ferrero, Nechio, 2016)) Here an OLG model with fixed retirement age, so if aging comes from longevity increase then it is mechanical to get a rise in K/Y 13 / 20

15 Wealth accumulation in a model of retirement Life cycle savings is not a good model for wealth accumulation Better with retirees and uncertain survival (Carvalho, Ferrero, Nechio, 2016)) Here an OLG model with fixed retirement age, so if aging comes from longevity increase then it is mechanical to get a rise in K/Y The literature shows that a bigger driver of aging and wealth accumulation is reduced fertility. (See Weil, in Handbook of Population and Family Econ) 13 / 20

16 Wealth accumulation in a model of retirement Life cycle savings is not a good model for wealth accumulation Better with retirees and uncertain survival (Carvalho, Ferrero, Nechio, 2016)) Here an OLG model with fixed retirement age, so if aging comes from longevity increase then it is mechanical to get a rise in K/Y The literature shows that a bigger driver of aging and wealth accumulation is reduced fertility. (See Weil, in Handbook of Population and Family Econ) The model should have endogenous fertility and retirement 13 / 20

17 Wealth accumulation in a model of retirement Life cycle savings is not a good model for wealth accumulation Better with retirees and uncertain survival (Carvalho, Ferrero, Nechio, 2016)) Here an OLG model with fixed retirement age, so if aging comes from longevity increase then it is mechanical to get a rise in K/Y The literature shows that a bigger driver of aging and wealth accumulation is reduced fertility. (See Weil, in Handbook of Population and Family Econ) The model should have endogenous fertility and retirement Then the role of pensions, annuities become important together with the role of baby-boomers: not every country has pay-as-you-go systems Abel and Blanchard (1983); Cutler et al. (1990); Auerbach and Kotlikoff (1987); Lim and Weil (2003) 13 / 20

18 POINT 2: Evaluating Model s Success Authors are upfront on being not the only explanation but claim a large fraction of the decline explained. 14 / 20

19 Calibration 15 / 20

20 Calibration Mismatch on timing; demographics is slow moving, reduction in interest rate more sudden calibrate to 5 year intervals? 16 / 20

21 Calibration Mismatch on timing; demographics is slow moving, reduction in interest rate more sudden calibrate to 5 year intervals? Or use US decennial censuses so initial point can be 1940, use only demographics, no financials and see how much non-targeted rates can be explained by the model? 16 / 20

22 Calibration Mismatch on timing; demographics is slow moving, reduction in interest rate more sudden calibrate to 5 year intervals? Or use US decennial censuses so initial point can be 1940, use only demographics, no financials and see how much non-targeted rates can be explained by the model? Nothing is NOT targeted it seems distributions of targeted and non-targeted variables will help 16 / 20

23 Calibration Mismatch on timing; demographics is slow moving, reduction in interest rate more sudden calibrate to 5 year intervals? Or use US decennial censuses so initial point can be 1940, use only demographics, no financials and see how much non-targeted rates can be explained by the model? Nothing is NOT targeted it seems distributions of targeted and non-targeted variables will help Figure 5 and 6 are all targeted so how do we evaluate model success? 16 / 20

24 Calibration Mismatch on timing; demographics is slow moving, reduction in interest rate more sudden calibrate to 5 year intervals? Or use US decennial censuses so initial point can be 1940, use only demographics, no financials and see how much non-targeted rates can be explained by the model? Nothing is NOT targeted it seems distributions of targeted and non-targeted variables will help Figure 5 and 6 are all targeted so how do we evaluate model success? Open economy dimension is important, maybe calibration should focus on that extension, instead of closed economy Recent data shows global imbalances are narrowing, the model implies they will get worse via demographics, important to quantify this effect on real rates. 16 / 20

25 POINT 3: Measurement What are the real rates? 17 / 20

26 What are the real rates? King and Low (2014) for real rates or Rachel and Smith (2015) for natural interest rate? (not equal unless monetary policy is neutral) Directly observable real rates: yields on inflation-indexed bonds, only available for a handful of countries (countries here are ok probably) Approximate real rates: Difference between nominal rates and inflation expectations At the end what we want is cost of capital 18 / 20

27 Real Rates and Cost of Capital Figure 3.3. Real Interest Rates, Real Returns on Equity, and Cost of Capital (Percent a year) 1. Short- and Long-Term Global Real Interest Rates Three-month real rate Ten-year real rate Term spread Expected Real Returns on Equity United States United Kingdom Global Real Interest Rates and Cost of Capital Global real interest rate Global cost of capital / 20

28 Conclusion This is a great paper! It made me really think about these issues, a must read for those who work on these questions 20 / 20

29 Conclusion This is a great paper! It made me really think about these issues, a must read for those who work on these questions For the next draft, it will help to make the point sharper if authors can clarify these points: 20 / 20

30 Conclusion This is a great paper! It made me really think about these issues, a must read for those who work on these questions For the next draft, it will help to make the point sharper if authors can clarify these points: Endogenous retirement: fixed retirement age not very reasonable when aging is due to longevity Maybe adding endogenous fertility if the aim is to explain the decline in real rates via wealth accumulation which goes via declining births (more important than housing) Improve the calibration on non targeted moments Clarify measurement issues 20 / 20